Capital Gain - resi vs. comm

[Land]

So, the wife and I were originally going to go for a pure LOE strategy, but we've decided that we will start out doing this and then after sufficient capital growth has been achieved, will sell off half the portfolio to own the other half outright and live off the rents.

Then we realised that if we're going to live off rent, it's better to have a high yielding portfolio i.e. commercial! So the plan is to LOE for a while (3-5 years), then sell all and buy commercial with the proceeds and live off a lovely, healthy yeild.

I have read that industrial generally returns a yeild of about 8-10%, and capital growth of 3%, whereas I know resi returns a yield of 4-5% and a capital growth of approx 8%.

My concern/question is about the capital gain and protection of our capital.

If the 3% capital gain is true for industrial, whilst we will enjoy lovely income/cashflow, in 10 years time, if we put $3M into resi or comm it would be worth the following amounts:

resi $6.47M
industrial $4.03M

At the 20 year mark, it looks like this:

resi $13.98M
industrial $5.4M

That's a huge difference!! I would really like to know everyone's opionion on this scenario and whether or not it actually plays out like this. If this actually occurs, does industrial property just get cheaper and cheaper to own relative to residential?

Does it actually play out like this over the years? I love the yeild, but very concerned about the disparity in capital growth.

 

[Land]

Dazzling?Grossreal?

C'mon guys and girls - this is a huge issue, any thoughts at all?

Is the 3% average growth for industrial not actually true?

 

[Dazz]

Good evening Land,

The family and I are taking our first holiday in 6 years, so forgive me if I am unable to answer your questions immediately. Looking after both industrial and residential stuff takes a bit of effort.

The growth and income figures you have quoted are pretty narrow for such a wide basket. These are similar to what I read and was quoted back to me by experts in the field when asking the same questions 4 years back.

All I can say is that the figures quoted are complete nonsense, for the very small patch of Oz we have our fingers in.

For example, you say, industrial growth is 3% p.a.......well, what are you talking about, your bucket is too big....are you talking about ;

A small, brand spanking strata unit warehouse in Logan Qld with installed tenant
A large vacant block on the Hume Hwy in Vic
An old rusty factory in Dry Creek SA
A Coles distribution centre near the Perth airport
A Telstra call centre in Davenport


All I can guarantee you is that trying to lump these properties into one big mythical bucket and then somehow trying to come up with a sensible yield and growth profile that describes all is just complete and utter nonsense.

You need to get way more specific and knowledge in your target market. You don't have enough money to buy "the market". Even if you've got a few mill. to spend, you'll only be able to pick up one or two good props, so you've got to get it right.

The property game, as you know, is way more specific, and gets down to the individual nuances of each title deed, and if you try and disect the beast with one or two very blunt cells on a XLS, you'll make a complete botch of the job.

By the way of a rough number for our props over the last 5 years here in Perth.....if I had to "lump them" into a basic pot ;

Resi growth : 22% (Low of 13% and high of 26%)
Resi yields : 4% gross (Low of 1.7% and high of 6.5%)

Industrial growth : 64% (Low of 14% and high of 83%)
Industrial yields : 12% nett (Low of 7.7% and high of 23%)


These are nothing similar to what we (and obviously you as well) have read from the experts. All I can say is....we ignored the experts and carried on with the business with a professional focus. Sometimes what the experts write and what gets published as gospel is a little bit left of the facts.

There's a story behind each of the numbers. In general, the props with all of the work done, and bugger all risk are the low numbers, and the one's that caused me a few grey hairs and sleepless nights are the ones bearing fruit right now.

What isn't mentioned there I suppose is the general upswell in the Perth region as a whole during that period. The resi stuff has died off, and as the years tick by that average will no doubt come down.

The industrial stuff and city CBD comm stuff however is powering along unabated. The drivers behind the growth over here (30+ year oil and mining supply contracts) do not respect and do not follow the 'expected cycles' published by all of the gurus over in the east. We should receive another 100% growth in both capital and rents, and this is forecast 'til at least the end of 2009 when some new supply should come on line.

I love to see however, the wise experts say that growth + rents must equal 14% or some such figure.....as it just keeps all of my competition at bay. Your observation is astute about the relative costs of things. The industrial stuff is not getting cheaper in relation to the resi.....in my experience it is the opposite. The resi is getting cheaper cos the grow is lower.

Good luck in your strategy. My only advice is to get down into the weeds, on the ground and sniff out the bargains, don't do high level passes with RE internet site scans.....you'll miss all of the diamonds in the rough.

 

[Land]

Thanks

Thanks for the reply Dazzling - hope you have a brilliant holiday! I'm sure you deserve it and you will be missed. Is is a road trip? I get the impression you have a fourby and a camper trailer, but could be completely wrong...

I was feeling despodent with the lack of reply from others, but really appreciate your feedback. I can't see that it is possible for industrial property to relatively become cheaper and cheaper in relation to resi (or other commercial) and so these nice neat capital growth figures just didn't seem logical. I do have a lot more research to do as you suggest.

Whilst I will still use our resi developments to get as much exposure as possible into the next Sydney boom, I am very keen to diversify into industrial first and foremost for the yeilds, but also for the greater opportunity to create deals by being creative. I also like the business-like nature of the leases etc, and also those CPI increases as well as market reviews. Just seems like a more professional manner in which to operate one's portfolio.

Thanks once again - you're opinion is highly respected.

 

[keithj]

....I am very keen to diversify into industrial first and foremost for the yeilds, but also for the greater opportunity to create deals by being creative.

Hi Land,

If you're aim is high yields, then have a read of this. Yields are at a cyclical low... with a (small) possibility of a rerun of early 90's, when comm property yields increased dramatically (because values decreased dramatically).

Comm prop is a lot more volatile than resi, the market does go down by >10% in consecutive years. So IMO either timing your purchase, or holding long term is the way to go.

Cheers Keith

 

[peteb]

This is a real life example :

2000 - purchase of a 6 storey property in heart of melb CBD. Building is run down, not tenants in upper floors, 4 shops (of about 100sqm) on the ground all under rented by about half. purchase price 4.4 mil

fix up ground floor shops and re-let , increasing of rent immediately

start doing up upper floors, let them to tennants and the tennant pays to refurb.

fast forward to now 2008....

selling off ground floor shops,
shop 1 sold off for 2.3 mil rent 102K per year
shop 2 sold off for 2.6 mil rent 124K per year

the next two shops are for sale in the next few weeks.

not a bad situation .

 

[Land]

Low yields?

Wow - great profit! Good to know what can be achieved.

BUT, those yeilds are really low aren't they? Under 5% for the purchasers - why would they want to purchase retail with such a low yeild?

 

[peteb]

maybe the purchasers were the owners of the businesses in the retail shops .... not sure.

also the value of the building 3 or 4 years ago was revalued at 14mil .. not sure what it's worth today .. probably a bit more.

 

[Glenn]

well, what are you talking about, your bucket is too big....are you talking about

A Coles distribution centre near the Perth airport

you must stop talking dirty, you filthy thing.....

give me more, NOW!

Glenn